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Ryanair's First Strike Is Getting Worse as Costs Keep Climbing

(Bloomberg) -- Ryanair Holdings Plc has been grappling with major strikes for the first time in its three-decade history. The disruption is headed for a new peak Friday with at least 400 flights lost across five nations as pilots ramp up a bid to wrest better contracts from a company defined by its penny-pinching culture.

What’s at stake?

Ryanair is Europe’s biggest low-cost airline thanks to the no-frills strategy of Michael O’Leary, its boss since 1994. Many of the demands being pursued by unions representing pilots and cabin crew -- from higher salaries and pensions to free drinking water -- would lift expenses, something Chief Operations Officer Peter Bellew says is unacceptable if it threatens the discount model.

How did it come to this?

O’Leary famously vowed never to accept unionization, but backed down in December after rostering foul-ups roiled Ryanair’s schedule. The unions were relatively quiet early this year as they drew up their demands -- but battle was joined at the start of the summer season, when planes are packed and Ryanair makes most of its money, allowing strikers to hold its feet to the fire.

What do the unions say?

Pilot grievances vary from country to country and can be pretty technical. Some want Ryanair to raise the fixed component of their pay and cut the variable part, which depends on flying hours, so that salaries become more predictable. Others want to make it harder for the carrier to move them to different cities. Pilots are “not nomads who set up their tents where Ryanair is smelling business,” German union Vereinigung Cockpit said this week.

Cabin crew demands are mostly more straightforward. A charter presented by staff from 21 countries seeks a “fair living wage,” unpaid leave, reductions in agency employment, a universal pension scheme -- and an end to being stung for an in-flight gulp of water. Labor representatives haven’t sugared the pill; VC says Ryanair must accept that personnel costs will rise and productivity fall.

How has Ryanair responded?

At times it has been downright hostile, telling 300 staff at its Dublin base that they may lose their jobs this winter as demand ebbs, and that they should consider moving to Poland. At other times the tone has been more conciliatory, such as an offer of mediation to resolve the dispute in Ireland.

One interpretation of Ryanair’s apparent mood swings is that the left hand doesn’t know what the right is doing, with management divided on the best approach, said analyst Andrew Lobbenberg at HSBC Global Research. A more generous view would be that the airline is employing “good cop, bad cop” tactics, he said.

How are customers coping?

People booked on canceled flights have the option of transferring to other Ryanair services, but that’s easier said than done. Fabienne Goetsch, interning in fashion in Copenhagen, tried to switch when a trip home to Dusseldorf for her grandmother’s birthday was wiped out by the strikes, but couldn’t find an affordable seat. “It makes me really sad,” she told Bloomberg.

Another traveler bound for Dublin from Brussels double booked after hearing news of the latest strike, only to find that her initial flight was going ahead and that there’d be no refund.

Ryanair said it’s taken every step it can to minimize disruption, and that the majority of its customers have been re-accommodated on another flight. “We want to again apologize to customers affected by this unnecessary disruption and we ask the striking unions to continue negotiations instead of calling anymore unjustified strikes.”

And investors?

Shares of Ryanair have declined 12 percent this year, including a 2.7 percent drop on Friday that’s cost the company its crown of Europe’s most valuable carrier. Ryanair’s market value is now 15.1 billion euros ($17.3 billion), just below British Airways owner IAG SA.

A lack of clarity about how much unionization will add to costs is the major concern. “The degree of magnitude is uncertain,” says Jonathan Fearon, investment director at Standard Life Aberdeen Plc, who has resisted selling down his stake and is betting that the strike amounts to “an interruption in a good long-term story.”

Ryanair will keep growing and probably remain Europe’s biggest low-cost airline, but with “a different level of profitability,” according to Lobbenberg.

What’s the impact on earnings?

Hard to say right now. A spokesman for the airline didn’t respond to questions about the bill for disrupted flights, but refunding thousands of passengers won’t come cheap.

Ryanair has budgeted 200 million euros for rising staff costs this year, half for higher pay, half for a rising headcount as it continues to expand even amid the walkouts. Unit costs excluding fuel will increase by 6 percent, partly because of higher pay, it said in May.

Then there are other less-tangible costs. The industrial action has forced the airline to cut fares, Bellew said at a briefing in Frankfurt on Wednesday, while Chief Marketing Officer Kenny Jacobs reckons the labor strife has put some potential customers off booking.

Who’s winning?

Ryanair has clearly suffered. Passenger growth last month was the slowest this year as walkouts forced the cancellation of hundreds of services. The company also posted a 20 percent drop in earnings for the quarter through June.

But it has one important advantage: time. Once the summer peak is over unions will have a weaker hand as their ability to disrupt schedules wanes. Low-cost carriers typically reduce frequencies in winter, suspend some routes and idle planes, meaning they can get by with fewer staff. So it could suit Ryanair to stretch things out.

Will O’Leary stick around?

The CEO, 57, has said it’s 50-50 as to whether he’ll stay beyond his 25th anniversary at the helm next year. But he’s dangled the prospect of quitting before and decided against it -- most recently when questioning whether his combative persona was suited to making Ryanair more customer friendly after deciding that its parsimonious approach was costing it passengers.

Fearon says there’s no evidence of Ryanair’s board wanting to get rid of the man who built the business. So it might be up to him to decide whether he’s willing to stick around for the fight.